Tuesday, 10 January 2012

The past, present and possible future of reward

The past and
present of reward

The concept of
reward has changed and evolved considerably with the passing of the years. For centuries,
organizations have exclusively paid their employees in cash and only relatively
recently has emerged a growing need for well-identified and specific reward
strategies, aiming at helping organizations to attain their intended objectives
by developing and offering their employees a diversified value proposition (Torrington
et al, 2008).

From the terminological point of view it can be
observed that the current term “reward” has largely replaced the older terms
“payment” and “remuneration.” It is not clearly only the wording which has evolved
over time, but rather and most importantly the meaning, concept and idea
associated with each term. Whether in fact the term “payment” appropriately reflects
the role once played by money, which represented the only form of remuneration offered
by employers to individuals in return for their contribution, the term “reward”
rather expresses the more comprehensive idea of a “package”, which is thus not
only composed of cash but of several elements, that is to say financial and
non-financial rewards.

The evolution of
the concept of payment has been indeed made possible by the diminished role once
played by trade unions in salary negotiations. As long as staff salaries were bargained
by employers with labor unions, more often
than not at industry and national level, employers’ latitude to design and
develop their reward systems and decide the composition of the reward packages to
offer to their employees was sensibly reduced (Torrington et al, 2008). There
are indeed still several countries in the EU where the bargaining power and influence
exerted by trade unions considerably restrict the employers’ ability and
autonomy to design, develop and offer reward packages effectively enabling them
to achieve their intended business strategies.

Firms can clearly
autonomously agree with employees the worth of their individual reward package,
but cash supplements have to be essentially provided in addition to what
employers have already agreed at industry, national and every so often also at
local level with unions. In these instances, incentives, bonuses and contingent
pay at large are thus granted to individuals at an additional cost compared to the
overall personnel budget already determined by employers on the basis of the
levels of pay bargained with trade unions. Whether employers would be put in a
position to freely use their overall personnel budget, these would clearly use
it differently. Rather than operating pay systems essentially based on length
of service, employers might have preferred, for instance, to establish contingent
pay systems or in any case, introduce the pay arrangements they would have
considered as most appropriate to enable them to more properly and effectively
influence their staff actions and foster the desired behaviour. Under such
circumstances, the payment of additional cash would no longer be taken for
granted by individuals in that bargained by unions, but would rather be
perceived, as it is, as a payment at risk, which needs thus to be re-earned
year after year to be repeated.

The fact that in the past and for centuries, differently
from what happens today, the only form of compensation provided by employers to
their staff in return for their work was exclusively represented by money can be
nonetheless definitely taken for granted.

The psychological
contract

Taking heed of the employee
point of view and expectations it should be added that initially and also in
this case for centuries, the terms and conditions of the psychological contract
at the basis of any work relationship were essentially represented by respect, fair
treatment and employment stability. Individuals were basically expected to
receive a salary in exchange for their work activity on the basis of a written
contract of employment and to be treated fairly and enjoy job stability, which typically
gave rise to the idea of a job for life (Porter et al, 2006), on the basis of the
expectations generated by an unwritten contract, that is, the psychological contract.
Employers were expected that in exchange for that employees would have done their
best to support their organization, would have been committed to its values, and
would have been loyal to the employer and compliant with the organizational
rules (Armstrong, 2009).

In order to enhance
individual loyalty, ensure that employees would have continued to do their utmost,
reward good performers, retain quality staff and attract new skilled
individuals employers subsequently started offering employees benefits, bonuses
and other forms of financial recognition in addition to base pay.

Conceivably by reason of their nature, the more
human beings become used to have, the more they aim at having and long to receive,
Maslow’s hierarchy of needs (1954) and Alderfer’s Existence - Relatedness - Growth
(ERG) theory (1972), just to name a couple of theories, are self-explanatory in
this sense. So whilst HR professionals and academics were investigating the impact
and effects produced by financial reward on staff’s performance (investigation
actually still underway), individuals were starting to develop and attach a
different meaning and content to the psychological contract. Taking for granted
job stability and pay, employees began attaching a growing significance to other
factors, that is to say training, career prospects and personal and
professional growth; which is clearly good for employers too. The psychological
contract was hence and is still changing and employers had and have to adapt
their value proposition accordingly.

The role played by money

The question is
whether financial reward still plays a role or whether it can be considered as completely
and totally irrelevant. Findings of hundreds of investigations and studies
carried out over the years on this subject have indeed led to different and
contrasting conclusions.

Prior to the global financial and economic downturn,
the role played by money as an effective motivator had been sensibly weakened
and considered questionable at best. The findings of a study carried out by
Jurgensen (1978) amongst 50,000 job applicants over a considerable period of 30
years, nonetheless, revealed that although men considered pay as the fifth most
important characteristic of a job and women considered pay as the seventh most
important factor, when the same individuals, irrespective of their gender, were
asked to rate the importance, in their opinion, other individuals with their
same characteristics (education, age, gender, etc.) attached to pay, cash gained
the top of the table. The vast majority of the individuals surveyed basically assumed
that pay was important for everyone but themselves.

The meaningfulness
and reliability of the findings produced by these types of investigations are
also affected by the methodology these use. As suggested by Slovic and
Lichtenstein (1971), when answering surveys questions individuals habitually
tend to underrate factors such as pay, which is considered socially less
important, to attach a greater significance to those factors which are mostly
appreciated as socially relevant. Yet, Lawler (1971) suggested that investigations
can lead to different conclusions according to the different methodologies which
have been used.

As in many other situations concerned with human
beings behaviour and reactions, the true is possibly in the middle: people need
and work for money but in the long run the influence of money may tend to fade,
which is what Herzberg’s (1957, 1968) two-factor theory basically maintains.
This idea is effectively summarised by Pfeffer (1998), who claimed that
individuals work for money but also “work to have fun” insofar as organizations
overlooking this aspect will see their staff’s lack of loyalty and commitment to
jump. Furnham (2006) claimed that money is not the most important thing and
that individuals could be happier “with more time off, or more job security”,
he also suggested that “people are prepared to trade-off things for money once
they have enough or grow weary of the game.”

Furnham to some extent seems to refer to
the same idea expressed by Herzberg. He indeed contends that people are willing
to turn money into time-off, but he also points out “once they have enough” (of
money). Herzberg considered cash as a weak motivator in the mid- to long-term
accepting thus that in the short run money might have its importance too. This
can be associated with the mechanism that after a period of time, when
individuals have gained financial stability and money is no longer perceived as
a reason for concern, these may need and seek something else; which recalls once
again the Maslow’s hierarchy of needs.

These ideas are also supported by the findings
of the “Employee attitude to pay – 2011” survey carried out by the CIPD (2012).
The investigation revealed that employees attitude towards their employers has overall
sensibly plummeted over the last four years (from +38 to the current +4). With specific
reference to individual motivation to perform well, the investigation revealed
that the net satisfaction score dropped from +46 (2008) to +24 (2011). The study
indeed provided additional, important information to understand what is behind
this employee negative outlook. Whereas the individuals who received a pay
increase in 2011 (45 percent compared to 68 percent in 2008) received an
average 2.5 percent pay rise, in the same period the Retail Prices Index
inflation recorded a sensibly higher 5.2 percent rate. This has noticeably
accounted for a reduction of the employees’ purchasing power and these cannot clearly
pay their mortgages off with work-life balance.

The impact made by the exogenous context

Employee perception of
reward is definitely affected by the economic climate, which clearly plays a
considerable role in individual attitude to money. The effects caused on individual
motivation by unexpectedly having less money than usual, due to their reduced
purchasing power, could be hence inevitable; that is why employers, especially
during downturn periods, should pay extra attention to the importance of properly
communicating their staff the reasons for their pay decisions. It will not
possibly help businesses to completely overcome the problem but it can if
anything help them to cushion the blow. Findings of the CIPD “Employee attitude
to pay – 2011” survey (2012) in fact also revealed that the net satisfaction
score attributed by respondents to the explanation provided by their employers about
their pay decisions decreased from +40 (2010) to +32 (2011).

It is not indeed only the
economic factor which needs to be considered but, amongst the others, also the
social one. Generation Y people, for instance, are in general considered to be
particularly sensitive both to the financial component of reward and to
work-life balance, albeit also in this case the aftermath of the past downturn altogether
with the effects produced by the current slowdown seem to have made quite an impact
on their attitude towards work.

The introduction of non-financial reward

The contrasting results provided
by the different investigations conducted over the years on the motivational effects
produced by cash suggested employers to extend and vary the composition of
their reward packages, prompting them to add to the financial component of
reward a non-financial component. Trying and motivating individuals only having
recourse to cash should have very soon proved for employers to be somewhat of a
bottomless pit. By contrast, offering employees opportunities for development
and growth and provide for these training courses would have very soon showed to
be beneficial to the business too. Trained, skilled and motivated staff can
clearly effectually help employers to achieve competitive edge.

The changing content of the psychological contract

Employees have consequently become
increasingly involved with their job activities. These aim at carrying out
compelling jobs, influencing the way these have to be performed and yielding positive
results to contribute to the organizational success. Individual level of
expertise and capability has thus grown sensibly. Employees feel so confident when
performing their job as to no longer regard job stability as a crucially
important component of their psychological contract; the skills these
constantly gain let them feel confident in terms of employability. The last
phase of the psychological contract evolution hence also sees job stability
switching to employability.

This evolution, notwithstanding, does not entail
that all of the employees have the same wants and aim at being rewarded in the
same way; the one-size in fact does not fit all. Not only are individuals
different one another and have different needs, but individual preferences are
also subject to change over time, with many external factors, that is to say
social, economic, technological, political, legal, environmental and cultural, likely
to make a considerable impact. There are clearly other factors which need to be
duly taken into consideration when making decisions about how to reward whom. Individuals
with a low Growth Need Strength (GNS), for instance, are likely to prefer more
generous financial reward packages and the introduction of flexible working practices
to personal growth and development. Offering these employees opportunity for
development and career could also prove to be counterproductive.

Each individual is essentially
expected to receive from his/her employer what is included in his individual
psychological contract. The problem is that it is an unwritten contract so that,
as suggested by Spindler (1994), individual expectations are implicit and
neither stated nor defined and “employers/employees expectations take the form
of unarticulated assumptions” (Armstrong, 2009).

Total reward can
definitely help

Total reward can unquestionably
help employers to develop programmes enabling them to offer individuals a
reward-mix capable of meeting their employees’ needs, but in order to organizations
properly operate these it is definitely crucial to find out what the individual
preferences are. Total reward can definitely help employers to manage the how
side of reward, but it is of paramount importance to previously investigate
what individuals are actually truly interested in. This knowledge would clearly
also help employers to design and develop reward packages consistent and
coherent, from the composition point of view, with individual expectations.

How can Total Reward Statements help

Once effective base and variable pay systems have been
developed, to stress and enhance the significance of their reward packages employers
can have recourse to total reward statements. These tools providing employees a
personalised, detailed indication of the worthiness of their take-up do not
actually add any intrinsic value to what employees already receive from their
firms, but aim at stressing and emphasizing that value.

Statements currently represent a sort of tool
marking the conclusion of the employers’ quest to improve the worth of their
value proposition; there is in fact apparently little at the moment which can
be added to the employers’ value proposition. By reason of the current economic
climate employers consider it more appropriate stressing the worth of the
packages these already offer, rather than to make the extra efforts necessary
to come up with additional forms of reward.

The likely future of reward

The future of reward,
nonetheless, does not really look grim; there definitely is still room for
improvement. Reward specialists have to literally squeeze their brains in order
to come up with brand new and attractive reward options, possibly also proving
to be inexpensive for employers, albeit this may apparently sound rather contradictory.
In order for reward specialists to yield good results these need to investigate
new opportunities which can arise working, for instance, side by side with tax
and financial experts. Effectual reward options can in fact still be found in
terms of voluntary benefits, especially for the undeniable positive effects
these can produce both for employees and employers in terms of tax and NI
savings. During periods characterised by financial hardships, for example, can prove
to be particularly useful and welcomed by staff the agreements reached by
employers with collective buying communities as well as staff discounts on
household bills. These types of opportunities could actually prove to be particularly
appreciated by the employees whose purchasing power has been weakened by an
inflation whose rate is higher than that of their salary increase; never mind those
employees who have not benefitted from any salary increase at all. Such initiatives
might also effectively contribute to keep employees focused on personal development
and job improvement, which in turn positively impact their performance and ultimately
organizational performance.

The
future of Total Reward

It
is an axiomatic fact that total reward represents the only approach enabling
employers to meet current and future employee expectations and wants and as
such the only viable approach to reward management. Whatever the future
development of reward, this is the only approach enabling organizations to
properly, promptly and effectually adapt their offering to the changing content
of the psychological contract and enabling organizations to provide their staff
a comprehensive and adequate value proposition.

Despite
it is everything but straightforward predicting how exactly total reward may develop
in the future and which changes might be implemented in the composition of
total reward packages, it can be argued that without question total reward
still has a great future ahead of it.

Considering
reward more extensively, or rather, from the reward management point of view, there
are indeed three approaches which can be considered crucial and important for
the future of reward, to wit: integrated reward, strategic reward and
evidence-based reward management.

Integrated reward management

Integrated
reward management is an approach according to which, as suggested by White
(2005), each single element of reward supports and reinforces one another in
order for organizations to attain their intended objectives. As contended by
Armstrong (2010), nonetheless, this integration has not to be pursued just
considering reward practices and policies, that is, just caring about reward
integration, but also considering the vertical and horizontal integration options.
The concept of vertical integration relates to the need to integrate reward
strategy with the business strategy, whereas the horizontal integration is
concerned with the alignment of reward strategy with HR practices and strategies;
in particular, with those concerned with engagement, talent management, L&D
and high performance (Armstrong, 2010).

Strategic reward
management

Approaching reward management strategically is clearly
of paramount importance. Employers should recognize the central importance of using
a structured approach and planning in advance to avert to suddenly have to deal
with the unexpected. As claimed by Brown (2001), strategic reward management
aims at creating “reward processes which are based on beliefs about what the organization
values and wants to achieve.” Strategic reward is basically concerned “with both
ends and means” of reward and aims at determining how reward procedures will be
in the future and at achieving reward management integration (Armstrong, 2010).

Evidence-based
reward management

The third pillar of the
typical reward system of the future is represented by the evidence-based feature,
that is, an approach “based on fact rather than opinion, on understanding
rather than assumptions” (Armstrong, 2010). This methodology will enable reward
specialists to answer without hesitation to the question: “How do you know what
you think you know?” which is the question that logical positivists considered
crucial answer to when exploring beliefs (Ayer, 1959).

The role played by Reward
Specialists

Reward specialists have
to constantly investigate their business reward system and regularly come up
with brilliant and ingenious ideas to improve and enhance it. Reward
professionals have to regularly gain knowledge of the findings of the different
investigations performed over time and of the theories emerged from these,
which have hence to be critically evaluated and studied in order to find out whether
these can be successfully and consistently applied within their organizations. In
order for reward professionals to effectively perform their activities these need
to pay extra attention to both theory and practice; as an anonymous once said
“theory without practice is sterile, practice without theory is futile
(Armstrong, 2010).” This concept was also stressed by McGregor (1960) who
suggested that there is nothing as practical as a good theory; referring to
theory as an assumption supported by the rigorous research carried out within
the business telling how things are and not how things are supposed to be.

All of that has to be clearly supported by the
constant observation and analysis of the results produced by the internal
reward practices and continuous external benchmarking. Careful attention have
to be paid and constant consideration to be given to good and best practices
too; notwithstanding, since the one-size-fits-all approach in reward management
is not really likely to effectively apply, to identify what it is really appropriate
for an organization reward specialists should invariably draw inspiration from the
concept of best fit (Armstrong, 2010).